INSIDE THIS ISSUE
The first quarter of 2012 saw an active Department of Justice (DOJ) in the area of criminal enforcement. The DOJ collected $548 million in fines from auto part suppliers, won guilty verdicts in an antitrust jury trial, and, for the first time, publicly acknowledged its expansive probe of the money center banks that participated in setting interest rate benchmarks. Two U.S. Court of Appeals decisions strengthened the ability of plaintiffs to privately enforce the antitrust laws. The U.S. Court of Appeals for the Sixth Circuit held that plaintiffs may draw factual allegations of antitrust violations from foreign enforcement agency investigations, in this case the European Commission (EC). The U.S. Court of Appeals for the Second Circuit refused to enforce class action waivers found in arbitration agreements when the waivers would effectively leave the plaintiffs without a mechanism to assert antitrust claims.
Fines Mount In DOJ Auto Parts Cartel Investigation
On January 30, 2012, the DOJ announced a second round of criminal charges in its global auto parts cartel investigation. Japanese auto part suppliers Yazaki Corp. and Denso Corp. pled guilty to criminal price-fixing charges and agreed to pay $548 million in fines. Under the plea deal, Yazaki will pay $470 million and four of its executives will serve prison terms. Denso will pay $78 million in fines. According to the DOJ, the $470 million fine paid by Yazaki is the second-largest ever fine for a price-fixing violation. In November 2011, the DOJ announced that Furukawa Electric Co., Ltd. pled guilty to price-fixing charges and agreed to pay a $200 million penalty, bringing the total fines in the probe to $748 million.
AU Optronics And Executives Found Guilty Of Price Fixing
On March 13, 2012, following a two-month trial, a federal jury in San Francisco, California, convicted AU Optronics Corp. and two of its executives of conspiring with other electronics makers to fix prices on thin film transistor liquid crystal display panels (LCD panels), commonly used in computer monitors and televisions. The jury convicted AU Optronic’s former president and its current vice president. The convicted executives face up to 10 years in prison and penalties of up to $1 million. AU Optronics faces a fine of up to $1 billion. The jury found that AU Optronics met with its competitors and fixed prices during a series of meetings between 2001 and 2006. The jury concluded the LCD panel makers gained more than $500 million from their price-fixing conspiracy. The overcharge amounts to $53 per panel. “The jury finding $500 million in ill-gotten gains by members of the cartel demonstrates the harmful effect of this price-fixing conspiracy on American businesses and consumers,” said Acting Assistant Attorney General Sharis A. Pozen. “The jury’s decision to hold not only the companies but also their top executives accountable for their anticompetitive actions should send a strong deterrent message to board rooms around the world.”
Other LCD makers pled guilty prior to trial; they include LG Display Co., Ltd., Chunghwa Picture Tubes Ltd., Chi Mei Optoelectronics Corp., and Sharp Corp. Under the plea deals, these companies agreed to pay more than $860 million in fines in aggregate.
DOJ Acknowledges Criminal Investigation Of Manipulation Of Benchmark Interest Rates
In a letter made public on March 6, 2012, the DOJ acknowledged its criminal investigation into collusive manipulation of benchmark interest rates, including the London Interbank Offered Rate (Libor), Tokyo Interbank Offered Rate (Tibor), and Euro Interbank Offered Rate (Euribor). The DOJ submitted the letter to the Honorable Naomi Reice Buchwald, U.S. District Court for the District of Southern New York, who is presiding over a multidistrict litigation involving class action lawsuits against the banks that participated in the setting of Libor, Tibor, and Euribor. Those banks include Credit Suisse Group AG, Bank of America Corp., Barclays PLC, Royal Bank of Scotland Group PLC, Citigroup Inc., Deutsche Bank AG, and UBS AG, among others.
Sixth Circuit Revives Copper Tubing Cartel Case
On March 2, 2012, the Sixth Circuit reversed the dismissal of an antitrust action brought by Carrier Corp., the largest manufacturer of air conditioning and commercial refrigeration equipment, against copper tube manufacturers Outokumpu Oyj and Mueller Industries, Inc. Carrier’s lawsuit stemmed, in part, from two investigations conducted by the EC in 2003 and 2004. The EC found that several copper tube manufacturers fixed prices and allocated customers in the markets for plumbing and industrial copper tubing. The EC’s findings were limited to Europe and did not make any findings about the U.S. market. Carrier alleged that the conspiracies extended to the U.S. market. Specifically, Carrier alleged that the conspirators allocated Carrier’s U.S. business to Outokumpu and its European business to Wieland Werke AG (Wieland) and KM Europa Metal AG (KME). Carrier’s complaint stated that shortly after the EC investigation was made public, Wieland and KME began competing with Outokumpu for Carrier’s U.S. business.
The district court held that Carrier’s allegations were “wholly unsubstantiated and frivolous” because the complaint drew allegations from the EC decisions and did not sufficiently allege an effect on U.S. markets. The Sixth Circuit reversed, finding the district court erred in failing to consider the EC-based allegations. The court explained that the EC’s silence as to the U.S. markets “may simply reflect the limited scope of the decision.” By disregarding allegations based on the EC’s findings, the district court had deprived Carrier of the presumption of the truth of its allegations. The court also found persuasive Carrier’s allegation that Wieland and KME entered the U.S. market shortly after the EC uncovered the conspiracy: “When two companies refrain from entering a market and then suddenly do so after a cartel dissolves, however, there are good grounds for suspicion.” Accordingly, Carrier’s allegations were sufficient to state a claim and the case was remanded for further proceedings in the district court.
Merchants Defeat Class Action Waivers In The Second Circuit
On January 31, 2012, the Second Circuit ruled that American Express Co. cannot enforce arbitration agreements containing class action waivers against merchants pursuing antitrust tying claims against the company. This decision is significant because it follows the U.S. Supreme Court’s recent rulings in AT&T Mobility LLC v. Concepcion, No. 09-893 (2011), and Stolt-Nielsen S.A. v. AnimalFeeds International Corp., No. 1198 (2010), in which the Court enforced class action waivers found in arbitration agreements.
The Second Circuit held that enforcement of the class action waivers would preclude the merchants’ ability to bring antitrust claims because individually arbitrating the claims would be cost-prohibitive, effectively depriving the merchants of the protection of the antitrust laws. The merchants submitted expert testimony that the average loss suffered by an individual merchant was $1,751, and the cost of an economist, which would be necessary to proving the claims, would be between $300,000 and $2 million. Thus, no individual merchant could be expected to assert a claim because to do so is not cost-effective. When merchants band together in a class action, however, the cost of the economist is shared among the many class members.
This was the third time the Second Circuit has held American Express’ class action waivers unenforceable against the merchants. The court concluded, “Eradicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes.”
On February 28, 2012, the Honorable Dennis Cavanaugh, U.S. District Court for the District of New Jersey, entered an order granting final approval of the proposed settlement in Plymouth County Contributory Retirement Systems v. Hassan, No. 08-1022 (“Plymouth”).
Plymouth was a shareholder derivative case brought on behalf of the Schering-Plough Corporation (“Schering”), a major U.S. pharmaceutical company based in New Jersey and now known as Merck & Co., Inc. as the result of a merger. The complaint alleged that numerous officers and directors of Schering concealed the results of the Enhance drug trial in order to conceal the fact that Schering’s marquee drug, Vytorin, was no more effective at reducing the risk of heart attacks than competing generics.
These actions by Schering’s officers and directors caused the company significant harm, including a 41% drop in share price when the truth was revealed, a loss in market capitalization, a rash of investigations by state attorneys general, U.S. Department of Justice and U.S. Food and Drug Administration investigations, class action lawsuits by patients or payors seeking reimbursement for payments for an ineffective product, securities class actions by investors, ERISA class actions by employees, insider trades of approximately $40 million, and the expenditure of hundreds of millions of dollars in fines and attorneys’ fees.
The action sought to hold Schering’s disloyal officers and directors accountable for this harm, and to ensure that such wrongdoing would not occur in the future. Scott+Scott, as counsel for the plaintiff, aggressively prosecuted this action by, among other things, reviewing 7,000,000 pages of documents that were produced in the action and by participating in over 40 depositions of fact witnesses. These efforts were successful in bringing about a settlement with the defendants and the company whereby the company would institute major corporate governance reforms designed to prevent the mishandling of drug trial results in the future. A well-respected expert in corporate governance at the Fordham University School of Law, Sean Griffith, valued the reforms achieved at $50-$75 million.
Scott+Scott is proud to have achieved this significant victory for the shareholders of Schering.
Federal Enforcement Agencies Investigate The Mortgage Loan Securitization Industry
In his January State of the Union address, President Obama announced the creation of a special unit of federal prosecutors and leading state attorneys general to expand investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. Since then, announcements have been made that the Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) have issued subpoenas to some of the largest banks in the country seeking documentation and other information related to the origination, underwriting, and securitization of mortgage loans.
When banks issue mortgage loans to home owners, it is common for these mortgage loans to then be sold to other institutions. These institutions often aggregate the mortgage loans into pools and create securities out of the large accumulations of loans. These securities are referred to as “mortgage-backed securities,” which are essentially investments in a portfolio of home mortgages. Mortgage-backed securities are sometimes referred to as “pass-through” securities because homeowners’ mortgage principal and interest payments are “passed through” to investors. The market for these instruments greatly expanded in the years leading up to the financial crisis of 2008, but has since plummeted and become the subject of dozens of lawsuits.
Five of the largest originators of mortgage loans during this era, JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, and Ally Financial, have all disclosed in their annual reports filed with the SEC that they are being targeted in the mortgage-backed securities investigations. Ally Financial reported that the SEC served subpoenas “seeking information about various aspects of the process surrounding securitizations of residential mortgages with which certain mortgage subsidiaries were involved as sponsor or servicer.” Wells Fargo disclosed it “has received a Wells Notice from SEC staff relating to Wells Fargo’s disclosures in mortgage-backed securities offering documents.”
This new investigation picks up where Congress left off. The Permanent Subcommittee on Investigations of the United States Senate investigated the cause of the financial crisis by holding hearings, subpoenaing documents, and conducting interviews. The committee issued a report in April 2011, concluding that the search for increased growth and profit by banks led to the origination and securitization of hundreds of billions of dollars in high risk, poor quality mortgages that ultimately plummeted in value, hurting investors and, ultimately, the U.S. financial system.
Although the SEC and DOJ are just beginning their investigations into the mortgage-backed securities industry, Scott+Scott has been on the forefront of this issue. Scott+Scott has extensive experience uncovering issues and prosecuting cases involving the sale of mortgage-backed securities, actively pursuing numerous cases on behalf of institutional investors who lost money by investing in these instruments. Although government investigations help to deter this conduct going forward, the true victims are unlikely to be compensated unless private actions are maintained.
Dodd-Frank Whistleblower Provisions & Advent Of The Professional Whistleblower
As the name implies, “whistleblower” is a term for an individual who informs authorities or brings attention to allegedly illegal or improper activities that might otherwise escape regulatory scrutiny.
whistle blowing and whistleblowers are relatively new and have evolved in large
part due to financial scandals. The most
recent iteration of these laws can be found in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank is a federal statute signed into
law by President Obama on July 21, 2010, in the wake of the 2007-2010 financial
crises. It was enacted as a way to curb
illegal activities in various financial markets in the
A cornerstone of Dodd-Frank is Section 922, which expanded the rules and protections extended to whistleblowers. Specifically, Section 922 established a new and dedicated whistleblower program within the Securities and Exchange Commission (“SEC”). Section 922’s whistleblower provisions are designed to protect whistleblowers when they step forward and to incentivize whistle blowing through the use of monetary awards.
Under Section 922, a whistleblower who voluntarily provides the SEC with original information about a violation of the securities laws leading to a successful SEC enforcement action is entitled to a percentage of the monetary sanction levied in the case. The reward is anywhere between 10%-30% of monetary sanctions that exceed $1 million.
An interesting and oft-debated aspect of Section 922 is the fact that, as written, Section 922 specifies that a whistleblower can be any individual who provides the SEC with information regarding a violation of securities laws. In other words, the provision is not limited to an employee or officer of the company in question. Any person with verifiable original information about a company’s violation of the securities laws stands to profit from blowing the whistle. For some whistleblowers, this could result in making a significant sum of money.
Consequently, many law firms have started to advertise services to whistleblowers. Financial blogs and information sharing portals are now replete with so-called “professional whistleblowers.”
While the advent of the professional whistleblower may or may not have been an intended consequence of Dodd-Frank, it is undeniable that whistle blowing is effective. According to the Association of Certified Fraud Examiners’ 2010 Report to the Nations on Occupational Fraud and Abuse, 40% of fraud cases involving public companies were detected by tips. And the SEC will not ignore valid tips simply because the informing party is not a company insider or employee. Instead, the SEC has recently commented that it wants to encourage people to come forward who can “connect the dots in ways that they hadn’t been connected before and in ways that our own Enforcement people hadn’t done.” Indeed, it has been recently noted that Dodd-Frank’s allowance for professional whistle-blowers allows the SEC to take advantage of the analytical analysis and intellectual abilities of academics and people who think outside the box.
As such, Dodd-Frank and the SEC’s apparent embrace of the advent of the professional whistleblower means that securities fraud tips, accusations, and investigations will likely rise in the coming years. What remains to be seen, however, is whether Dodd-Frank and professional whistleblowers will increase securities fraud convictions and securities fraud recoveries.
+April 12-13, 2012
New England States GFOA (NESGFOA) 20th Annual Seminar
The Conference Center at Waltham Woods
NESGFOA promotes and encourages a closer relationship among those engaged in finance in the municipal, state, and federal service. The conference provides discussion, analysis, and solutions under the laws existing in the New England states to public officials whose responsibilities and duties involve addressing state and municipal problems. The conference also offers educational programs and training especially important to public finance officials and employees during pension reform.
+April 29-May 2, 2012
Building and Construction Trades Department AFL-CIO (BCTD) Legislative Conference
Washington Hilton and Towers Hotel
The conference offers the building trades unions to unite in one location to share information regarding many aspects of union business: union organizing, contract negotiations, fiduciary responsibilities, Taft-Hartley fund issues, and media matters, as well as legislation. This is one of the largest and most comprehensive union conferences where participants include new union members and international presidents of unions in several of the building trades.
Government Finance Officers Association Conferences
+April 3-5, 2012
New York State GFOA
Albany Marriott Hotel
+April 18-20, 2012
California Municipal Treasurers Association (CMTA)
Hyatt Regency Sacramento
+April 18-20, 2012
Holiday Inn Airport
Des Moines, IA
+April 18-20, 2012
St. George, UT
+April 20, 2012
+April 24, 2012
Oregon State Fiscal Association (OSFA)
Salem Conference Center
+April 26, 2012
Anthony’s Ocean View
New Haven, CT
+April 29-May 2, 2012
Penn Stater Hotel and Conference Center
State College, PA
Thomas Jefferson, born April 13, 1743, and author of the Declaration of Independance:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
-- The unanimous declaration of the thirteen United States of America, July 4, 1776.
Scott + Scott LLP is a nationally recognized law firm headquartered in Connecticut with offices in New York City, Ohio and California. The firm represents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.
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